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Chapter 21: Q. 21.1LO (page 465)

Understand the concept of economic rent.

Short Answer

Expert verified

The economic sector is becoming increasingly financialized by engaging explicitly in share buy-backs asa method to maximize shareholder payments .

Step by step solution

01

Given Information

‘Economic rent’ will be broadly defined as income derived from ownership or control over a limited asset or resource. Such income is attained with none expenditure or effort on behalf of the resource holder or in more than their cost.

02

Explanation

  • The financial sector increasingly allocates resources towards unproductive activities, charging fees and interest within the process. Land rents are exploding, leading to a housing affordability crisis in many advanced economy cities.
  • The economic sector is becoming increasingly financialized by engaging explicitly in share buy-backs as a method to maximize shareholder payments, i.e. financial rents, rather than focusing on long-term productive investment.
  • In all the other ways, sublet company types seem to become increasingly dominant in capitalist production.

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Most popular questions from this chapter

Reconsider Figure 21-1 and the data provided in Problem 21-19, and suppose that P2=$2,800 per acre. By how much do economic rents change when the rental rate on land rises from P1toP2 in the figure?

The owner of WebCity is trying to decide whether to remain a proprietorship or to incorporate. Suppose that the corporate tax rate on profits is 20percent and the personal income tax rate is localid="1653216490078" 30percent. For simplicity, assume that all corporate profits (after corporate taxes are paid) are distributed as dividends in the year they are earned and that such dividends are subject to tax at the personal income tax rate.

a. If the owner of WebCity expects to earn localid="1653216495193" \(100,000in before-tax profits this year, regardless of whether the firm is a proprietorship or a corporation, which method of organization should be chosen?

b. What is the dollar value of the after-tax advantage of the form of organization determined in part (a)?

c. Suppose that the corporate form of organization has cost advantages that will raise beforetax profits by localid="1653216505277" \)50,000. Should the owner of WebCity incorporate?

d. Based on parts (a) and (c), by how much will after-tax profits change due to incorporation?

e. Suppose that tax policy is changed to completely exempt from personal taxation the first localid="1653216517393" $40,000per year in dividends. Would this change in policy affect the decision made in part (a)?

f. How can you explain the fact that even though corporate profits are subject to double taxation, most business in the United States is conducted by corporations rather than by proprietorships or partnerships?

Consider Figure 21-2. Explain why the figure indicates that if the normal rate of return on investment were to remain unchanged while accounting profit increased, economic profit also would increase.

A British pharmaceutical company spent several years and considerable funds on the development of a treatment for HIV patients. Now, with the protection afforded by patent rights, the company has the potential to reap enormous gains. The government, in response, has threatened to tax away any economic rents the company may earn. Is this a sensible policy? Why or why not? (Hint: Contrast the short-run and long-run effects of taxing away the economic rents.)

After graduation, you face a choice. One option is to work for a multinational consulting firm and earn a starting salary (benefits included) of \(40,000. The other option is to use\)5,000in savings to start your own consulting firm. You could earn an interest return of 5 percent on your savings. You choose to start your own consulting firm. At the end of the first year, you add up all of your expenses and revenues. Your total includes \(12,000in rent, \)1,000in office supplies, \(20,000for office staff, and \)4,000in telecommunications expenses. What are your total explicit costs and total implicit costs?
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